AI and Gen AI were key characters in the story of asset management in 2024. Gen AI is driving efficiency at multiple stages along decision-making processes, achieving greater efficiencies, lower costs and superior results. At Linedata, we recently found that 36% of asset managers are already leveraging AI, with an additional 37% planning to expand its use.
In 2025, Gen AI will be still more impactful, automating middle- and back-office operations, helping risk modellers and compliance professionals, and delivering a greater experience to clients. However, fears around hallucinations and bias persist, meaning asset managers will need to ensure the proper guardrails are in place to achieve responsible AI adoption and comply with new regulations like the EU’s AI Act which officially entered into force on August 1, 2024.
AI for transparency and visibility
In the past, Gen AI was seen as a mysterious black box of unknowable algorithms. It was impossible to know how the technology arrived at a decision or result, making it difficult to understand and impossible to audit. In 2025, we will see the adoption of Explainable Artificial Intelligence (XAI) in risk assessment and management systems. This set of processes and methods will increasingly allow financial services professionals to use AI with greater levels of trust and an understanding of biases and limitations.
With this new degree of trust, AI and Gen AI can be used to make the world of asset management more transparent too, shining a light on complex processes and extracting more value from unstructured data. With Gen AI, unstructured data (text documents, emails, and other difficult-to-analyse data formats) can for the first time be accessed and processed using retrieval-augmented generation (RAG). In this way, AI allows asset managers to tap into a wealth of previously unexploited customer data and internal information.
In a similar way, Gen AI will inform external investment strategies next year too. There is a consensus that public markets will not offer strong returns in 2025. With return of investment (ROI) on public securities likely to remain low for some time, we will see both asset and wealth managers pile into alternative assets.
Without the help of Gen AI, it is well known that private trading can be less transparent. Esoteric securities like collateralised loan obligations (CLOs) and catastrophe bonds are more complex, and because they are not publicly traded, you cannot easily find information about pricing or terms and conditions of the security. As investors seek transparency around the securities and funds they are investing in, 2025 will see AI used to translate data about these private and esoteric securities.
When you would otherwise be forced to find the underlying conditions of a security in a PDF report, AI can make unstructured data understandable. In this way, the rise of generative AI has the potential to increase trust in riskier private markets. Traders will spend less time on manual data analysis and instead use AI insights to focus on strategy and decision making.
Striking a balance between innovation and good governance
However, as firms begin to reap the rewards of Gen AI in 2025, they will also have to face new regulations mandating guardrails for AI’s use. The impact of the European Union’s AI Act, which came into force on August 1, 2024, is not yet well understood by asset managers. In 2025, it will become clearer and more impactful.
What we know already is the EU AI Act is designed to regulate high-risk AI applications, ensuring safety, transparency, and accountability. This presents a challenge for asset managers who are increasingly reliant on AI for critical decision-making processes. If they haven’t already, financial institutions will need to revisit their governance and risk management frameworks to ensure compliance, or risk facing significant financial penalties. Striking the right balance between innovation and compliance will be essential for firms that want to maintain their competitive edge without falling afoul of regulatory bodies.
For many, the situation echoes the introduction of the General Data Protection Regulation (GDPR) in 2018. Much like the EU AI Act, GDPR brought sweeping changes, requiring firms across industries to overhaul their data governance practices.
Initially, many companies found themselves scrambling to comply, often viewing the regulation as a barrier to innovation. However, as time passed, firms began to see how GDPR compliance could serve as a competitive advantage, fostering trust with customers by demonstrating a commitment to privacy and data protection. Asset managers should take the same stance with the EU’s AI Act in 2025 and beyond.
AI advancement remains unpredictable
While we may make an educated guess about AI impact in 2025, if we have learnt anything about the technology in the past few years, it is that the pace of change is whiplash-inducing. Executives must stay agile and prepare for more surprises to come, both in the shape of new innovations and also new regulations. Therefore, financial services organisations should focus on what they can control. If they invest in the right data frameworks, cloud infrastructure, and governance practices, they can be confident that Gen AI will make their businesses smarter, safer, and more profitable into the future.
